OBR analysis: where will the new jobs come from?

The Office for Budget Responsibility is forecasting the net creation of 2 million jobs over the next five years – but has provided no information on where these jobs are likely to come from. As Adam has pointed out, in previous recessions it took considerably longer for employment levels to rise by this amount.

So, in an attempt to better understand the OBR’s forecasts and consider where jobs may be created, we have (as reported in The Guardian on Saturday) looked at jobs growth by sector following previous recessions.

ONS’s estimates of workforce jobs are the best means to consider change in employment levels by sector. Although job levels vary from employment levels (some people have two jobs, and the workforce jobs estimates are mainly taken from employer surveys rather than the Labour Force Survey) net change provides a good indication of how employment changed across the economy in previous post-recession periods.

Looking firstly at the1980s recession, from the second quarter of growth following the end of the downturn (Q3 1981) to Q4 1988 (the point at which employment levels – as set out in Adam’s analysis – had increased by 2 million) the total number of jobs had increased by 2,416,000. But in some sectors, the number of jobs had fallen. In mining, electricity and gas (-229,000), manufacturing (-733,000) and transport and communications (-37,000) jobs had been lost – a net loss of close to 1 million (999,000) positions.

Other sectors therefore saw significant levels of jobs growth. Finance and business services saw a 1,164,000 increase in jobs, followed by distribution, hotels and restaurants (which includes retail) where 748,000 jobs were created. There was also a significant rise in jobs in (or funded by) the public sector (705,000 jobs created in public admin, education and health) and in construction (430,000).

The period following the 1990s downturn saw a similar pattern. From Q1 1992 to Q3 2001 (the period over which employment levels increased by 2 million) 1,943,000 jobs were created. Again, there were significant falls in some sectors – agriculture and fishing (-195,000), mining, electricity, gas and water (-127,000), manufacturing (-576,000) and construction (-132,000) – which were offset by considerable rises elsewhere. The sectors creating the most jobs were, as with the 1980s, finance and business services (1,414,000), distribution, hotels and restaurants (556,000) and public admin, education and health (387,000).

So, what does this analysis suggest for the current post-recession period? Firstly, it shows that when jobs are falling in some sectors, it is feasible for overall job creation levels to rise – albeit at a slower timescale than forecast by the OBR. But it is also clear that jobs growth in the past has been strongly driven by finance and business services – a sector that has been hit extremely hard by the current downturn losing over 290,000 jobs (compared to a gain of 7,000 jobs over the 1980s recession, and a loss of 94,000 during the 1990s recession).

Public admin, health and education has also seen net gains following previous recessions – but over the next five years the OBR is predicting a net fall in public sector employment of around 600,000. Of course the OBR’s estimates relate to directly employed public sector workers, and increased contracting out may lead to some growth in the number of private sector employees delivering public services. But even if this is the case, with the most severe spending cuts since WW2 on the cards it seems unlikely that (even if public services being delivered by the private sector were included) jobs growth in this area will be on a par with previous post-recession experiences.

If the recovery follows previous models, this would leave retail and hotels as the key driver of jobs creation. If GDP growth follows the OBR’s forecasts, there is no reason to suppose that jobs would not be created in these sectors – but what would the rate be? With growth forecast to be lower than previous post-recession periods, consumption will probably also be less, leading to fewer service sector jobs than in the past. And even the most optimistic scenario could not possibly lead to anywhere close to 2 million jobs in these sectors being created over 5 years – in the entire period since Q1 1980 until the end of last year, only 1,160,000 jobs were gained in distribution, hotels and restaurants.

Given that finance and business services and the public sector will not be driving jobs growth, and that the gains in retail and hospitality may be significant but nowhere near enough to reach the OBR’s totals, hopes may rest with manufacturing. But this would be a heroic assumption – since 1980 more than 4 million manufacturing jobs have been lost, and job levels have been falling consistently since 1998. In the absence of any clear strategy to support manufacturing jobs growth it is unclear both how this trend will be reversed and how enough jobs will be created to allow the realisation of the OBR’s forecasts.

Analysis of jobs growth following previous recessions shows that the OBR’s analysis is at best optimistic. When combined with analysis of change in workforce jobs by sector it becomes even more questionable – 2 million jobs weren’t created in 5 years even when finance was booming and public admin, health and education jobs were on the rise. For their analysis to have any credibility, the OBR need to tell us where the jobs will come from.

Written by Nicola Smith

I’m Head of the Economic and Social Affairs Department at the TUC. I also represent the TUC on the Social Security Advisory Committee. My posts may therefore range from the environment to the welfare state via macro-economic policy but will ine…

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